Study: Nearly One in Five Mortgage Defaults Are ‘Strategic’

A new report estimates that nearly one in five mortgage defaults through the first half of 2009 were “strategic,” where borrowers who appeared to have the capacity to pay their mortgages stopped doing so.

The research follows on an earlier report by Experian and Oliver Wyman that first aimed to quantify the share of mortgage defaults that are “strategic.” Strategic defaulters are defined as those who miss six straight mortgage payments without missing multiple payments on auto loans and other consumer debts for the six months after they first fell behind on mortgage payments.

The report finds that the share of borrowers who strategically defaulted through the first half of 2009 is unchanged from the end of 2008. Still, the absolute number of strategic defaults in the first half of 2009 increased 53% from the year ago period.

Researchers suggest that the share of strategic defaults may have hit a plateau as total mortgage delinquencies and may have also peaked in the fourth quarter of 2008. “We’re seeing this encouraging break in the quarterly data,” said Charles Chung, general manager of decision sciences at Experian.

But those results are “heavily contingent” on the stabilization in home prices that materialized one year ago, as government stimulus aimed to set a floor for home prices.

One big question going forward: do strategic defaulters begin to account for a growing share of defaults, especially if the total pool of mortgage defaults shrinks as unemployment subsides. While a better job market would slow the pace of traditional mortgage defaults, many potential strategic defaults—those who owe far more than their homes are worth—would need home prices to appreciate to change their calculus.

Indeed, the report finds that strategic default remains heavily concentrated in California, Florida, and western states that have seen the biggest run-up and decline in home prices. Strategic defaulters in California were nearly 80 times higher in the first two quarters of 2009 versus 2005.

While those states had higher concentrations of investor-owned properties that are particularly vulnerable to walkaways, the report finds that 68% of all strategic defaulters had just one first mortgage, up from 64% in 2008.

The report comes as Fannie Mae last week stepped up a public-relations campaign to warn of the possible repercussions of strategic default. The government-owned mortgage-finance titan said it would begin to pursue legal actions against borrowers who walked away from mortgages when they had the capacity to pay.

It also said it would lengthen to seven years, from five, the amount of time that borrowers must wait before receiving a new loan after a foreclosure unless those borrowers could show that they had defaulted due to hardship and after seeking a workout from their lender.

Readers, are you thinking about walking away from a loan you could afford to pay? Would tougher sanctions change your mind? Email us: nick.timiraos@wsj.com.

Follow for more mortgages and housing news on Twitter: @NickTimiraos

A new report estimates that nearly one in five mortgage defaults through the first half of 2009 were “strategic,” where borrowers who appeared to have the capacity to pay their mortgages stopped doing so.

The research follows on an earlier report by Experian and Oliver Wyman that first aimed to quantify the share of mortgage defaults that are “strategic.” Strategic defaulters are defined as those who miss six straight mortgage payments without missing multiple payments on auto loans and other consumer debts for the six months after they first fell behind on mortgage payments.

The report finds that the share of borrowers who strategically defaulted through the first half of 2009 is unchanged from the end of 2008. Still, the absolute number of strategic defaults in the first half of 2009 increased 53% from the year ago period.

Researchers suggest that the share of strategic defaults may have hit a plateau as total mortgage delinquencies and may have also peaked in the fourth quarter of 2008. “We’re seeing this encouraging break in the quarterly data,” said Charles Chung, general manager of decision sciences at Experian.

But those results are “heavily contingent” on the stabilization in home prices that materialized one year ago, as government stimulus aimed to set a floor for home prices.

One big question going forward: do strategic defaulters begin to account for a growing share of defaults, especially if the total pool of mortgage defaults shrinks as unemployment subsides. While a better job market would slow the pace of traditional mortgage defaults, many potential strategic defaults—those who owe far more than their homes are worth—would need home prices to appreciate to change their calculus.

Indeed, the report finds that strategic default remains heavily concentrated in California, Florida, and western states that have seen the biggest run-up and decline in home prices. Strategic defaulters in California were nearly 80 times higher in the first two quarters of 2009 versus 2005.

While those states had higher concentrations of investor-owned properties that are particularly vulnerable to walkaways, the report finds that 68% of all strategic defaulters had just one first mortgage, up from 64% in 2008.

The report comes as Fannie Mae last week stepped up a public-relations campaign to warn of the possible repercussions of strategic default. The government-owned mortgage-finance titan said it would begin to pursue legal actions against borrowers who walked away from mortgages when they had the capacity to pay.

It also said it would lengthen to seven years, from five, the amount of time that borrowers must wait before receiving a new loan after a foreclosure unless those borrowers could show that they had defaulted due to hardship and after seeking a workout from their lender.

Readers, are you thinking about walking away from a loan you could afford to pay? Would tougher sanctions change your mind? Email us: nick.timiraos@wsj.com.

Update: A new Fed study tries to figure out at just what point underwater borrowers throw in the towel.